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Sirius still seriously expensive
Sirius Satellite Radio can beam 100 commercial-free channels to your car, but it's a long way from profitable -- or from justifying its out-of-this-world valuation.
By Jon D. Markman
If there is anything that Americans do well, its creating a new mass medium, loading it up with cheap entertainment that stretches the bounds of taste and financing it with stock.
That was the formula for cable television in the 1970s and the Internet in the 1990s. And it is what makes Sirius Satellite Radio (SIRI, news, msgs) such an intriguing company today, as it emerges from the brink of bankruptcy and now appears ready to rock the nations cars, planes, boats, RVs, homes and offices with streams of music that, in some cases, would make a prison guard blush. (See earlier column.)
Unencumbered by the federal decency rules that encumber radio broadcasters, Sirius might endear itself with teens for its decision to broadcast songs such as Boom by Da Brat, in which a girl boasts without benefit of poetic license of her sexual conquests. But for many of the folks in the satellite radio companys target demographic (grown-ups with cars and enough of a love for music to spend $12.95 a month to get it piped from space commercial-free), its uncensored streams of hip-hop could backfire. The very first time I turned on a test unit in my car, with my wife and young kids in attendance, we were treated to the F word, the S word and the MF word in rapid succession. All of which led my wife to use the O word -- Turn that thing off!
Rap accounts for less than 5% of the music available on Sirius, but it is emblematic of the largest problem facing the companys shareholders. And that is that the current price, at around $2, calls to mind another O word: obscene.
Siriusly profit-challenged
After nearly a decade of struggle to get its satellites in the sky, its music programming organized and deals with hardware manufacturers and car makers finalized, Sirius only started selling service at the start of this year. So it is not surprising that it has so far acquired only about 100,000 subscriptions -- about the same as a small-town newspaper -- and booked only $2.3 million in revenue in the past 12 months.
Those figures would be fine if the company were a promising start-up with a market capitalization under $100 million. But Sirius has 911 million shares outstanding and a market capitalization of $1.8 billion. Which makes it, by an order of magnitude, one of the most expensive stocks in the market today, with a price-to-sales multiple of 113.5. Companies are generally considered expensive when they have price-to-sales multiples over 3, and only premium companies with great prospects earn price-to-sales multiples of 5 to 10. eBays (EBAY, news, msgs) is 19.8, Yahoo!s (YHOO, news, msgs) is 16.8, Amazon.coms (AMZN, news, msgs) is 3.6, Intels (INTC, news, msgs) is 6, PepsiCos (PEP, news, msgs) is 3, and Wal-Mart Stores (WMT, news, msgs) is 0.98. Sirius only satellite radio competitor, XM Satellite Radio Holdings (XMSR, news, msgs), sports a price-to-sales multiple of 49.
Of the 3,950 companies in the MSN Money database with market capitalizations greater than $100 million, only 24 have price-to-sales multiples greater than 100 -- and all but Sirius are biotechnology companies with drugs in their pipelines with the potential to save lives. About all that Sirius can save you from is the tedium of listening to insipid ads -- a noble goal, to be sure, but perhaps not in the same league, morally or financially, as curing cancer.
Of course, that valuation is backward-looking. If the company executes on its plan and makes a strong move this year to catch its only competitor, XM Satellite Holdings, in subscription growth, todays price could seem cheap. Indeed, when Sirius announces its second-quarter results later today, it may well report revenue of $3 million, a figure that would make the sales multiple a bit less crazy. But the fact remains, for the foreseeable future, the shares will remain a highly speculative bet -- akin to a venture capital investment -- that the companys management can leverage some of the $500 million cash they raised this year into a marketing campaign that will persuade many hundreds of thousands of consumers to pay for something they currently get for free. With cash burn of about $74 million a quarter, according to Sanders Morris Harris analyst Steve Mather, it may be useful to think of Sirius as a biotech in the sky.
Of course, the point of the marketing will be that satellite radio is much more than what you get for free on commercial radio -- and it is. My complaint about the uncensored rap stream aside, Sirius provides a wonderful listening experience. Out of the 100 streams of music and news, I found myself attracted to 13: two pop, three rock, one rap, three classical, two jazz and two news. That compares with just four radio stations I like in Seattle, so variety alone is a good start.
Other strong points:- The music is well-programmed;
- DJs offer only song information instead of amateurish comedy;
- a remote control allows four different users to have nine separate presets,
- you can block offensive streams;
- the absence of ads is a godsend;
- you can listen to CNBC and CNN in the car; and
- the hardware and software are brilliantly designed for ease of use with a minimum of installation or manual reading.
The only technical hassle is that reception cuts out when you travel through a tunnel or under a canopy of trees, since the satellite signal is blocked.
The hard sell
You still have to wonder whether enough people will find the service compelling enough to spend $12.95 a month. Yet if ever there were a chief executive who should be able to give it a go, it is Joe Clayton, an affable Kentucky native with deep experience in consumer electronics sales, including the successful launch of DirecTV satellite television while an executive at Thomson MultiMedia (TMS, news, msgs).
I met Clayton at Sirius office in Rockefeller Center in New York recently, and he gave me the big-vision spiel. You have to suspend your disbelief at the value of the shares for a moment, and just listen. Because if the price ever declines to a level that more reasonably compensates you for the risk of ownership -- or subscriber growth rates pick up -- you might just find it worth consideration. Heres a rundown of the pitch:- Sirius is heavily subsidizing the cost of the home and auto receivers to lower the price to levels -- now as low as $99 -- that can make it a mass-market device. It expects to make its money in content subscriptions, not the sale of the device. Successive generations of hardware should see reductions of 30% in cost with additional features added. Thus, it sees itself as a subscription-selling media company, not a consumer electronics company.
- It is pursuing plans to reduce home units to the size of an MP3 player; the unit would allow users to cache, or download, music from the satellite and carry it anywhere.
- It is pushing sales and subscriptions simultaneously through automobile manufacturers, who will install it as a factory option; car dealers; major retailers such as Best Buy (BBY, news, msgs); mom-and-pop retailers in smaller towns; and mail-order catalogs such as Crutchfield. It prefers to go through auto manufacturers, such as Mercedes-Benz and Infiniti, as there are fewer distribution middlemen to nick a cut of the sale. The Holy Grail is to have a major U.S. car maker, like current partners Ford or Chrysler, make satellite radio units a factory standard option; Sirius is likely to send a sizable chunk of its cash to automakers to make this happen.
- It is pursuing exclusive sports contracts, niche audiences and data. This year it broadcast NBA games and Nascar races. It also produces an in-house gay and lesbian channel. It has four channels of Spanish, and if it clears regulatory approval for sales in Canada, will add French. It has plans for a text-only channel with a ticker on the tuner showing sports scores and stock prices. Some will be sponsored by advertisers.
- Sirius has demonstrated the ability to stream video through its system to users equipped with special tuners and screens, and plans to roll out the service in the next year.
Whats the end game? Sirius expects to have 300,000 subscribers by the end of 2003, 1 million by the end of 2004, and to be cash-flow positive by the second quarter of 2005 with 2 million subscribers. Those are big numbers that may be hard to achieve without a lot more marketing muscle. Its not going to get there at the current pace, estimated by Sanders Morris analyst Mather at about 40,000 per quarter. When I asked whether the companys destiny is likely to include acquisition by a large radio or multimedia conglomerate such as Viacom (VIA, news, msgs), Walt Disney (DIS, news, msgs) or AOL Time Warner (AOL, news, msgs), Clayton leaned back in his chair, smiled and said he would listen to any offer. With most of the infrastructure paid for, service under way and money in the bank, my guess is that a merger bid will come well before profitability.
Fine Print
Sirius and XM continue to announce new deals with key distribution partners. Winnebago Industries (WGO, news, msgs) last week announced it would offer Sirius as an option in most of its 2004 motor homes and standard equipment on some. Formula Powerboats announced it would install Sirius as a standard feature on its 2004 boat line. Avionics Innovations, a leading in-flight entertainment company, announced that the FAA had approved its new Sirius device aimed at installation in private aircraft. Infiniti, the luxury brand of Nissan Motor (NSANY, news, msgs), announced it would offer Sirius in all of its cars as a factory option. BusinessWeek ran a good column last week on the question of the revaluation of the yuan; read it here.
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdm@oddpost.com. At the time of publication, he had a long position in Sirius Satellite Radio, but positions can change at any time.
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